BASSETERRE, St. Kitts – When people hear the word tax, most tend to worry how it will affect their monthly spending. In the same way, the implementation of a Value Added Tax (VAT) in the Federation has caused many to wonder if they will be able to afford bread, electricity and many other basic necessities.
The new tax, as announced by Prime Minister and Minister of Finance Hon. Dr. Denzil Douglas, will replace 12 existing taxes, including Consumption Tax, Hotel and Restaurant Tax, Cable TV Tax and Traders Tax among others. However, his recent revelation of a proposed 19% rate of taxation has sent shivers through the pocketbook of ordinary people wondering if they will be able to make ends meet.
On the verge of making a number of serious policy decisions for the introduction of the tax, the government is drawing on the experiences in other CARICOM States. Guyana is one such example and may give an idea as to how VAT may affect cost of living.
Though that country boasted a relatively smooth transition, a 2010 report by the Statistical Bureau indicates that following the introduction of VAT prices of very basic vegetables, fruits and cereal products saw increases ranging from 10.8- 20.6%.
Additionally, the advent of the VAT has been blamed for an apparent spike in cost of living in that country.
“Although we are satisfied that these figures err on the side of conservatism, they nevertheless confirm the stringent and demanding economic conditions under which the Guyanese people are forced to live.... These massive increases have been triggered primarily by the unconscionable 16% VAT,” the main opposition party PNCR contended.
Local economist and financial expert Vernon Harris predicts a similarly drastic increase in cost of living in the Federation, as he recently warned of a VAT rate of at least 20% - slightly higher than the PM’s proposed rate. Harris argues that in order to meet federal budget demands and to service the national debt, a high rate of taxation is necessary. He added that VAT is not a tax designed to make life easier on the consumer.
“The sooner the government tells the people the truth about VAT and stops pretending that they are introducing VAT to alleviate the problems in the country, the better.
“VAT is a tax on goods and services and it is a tax on the final consumer. It will be introduced to help government; it is not a tax which helps the consumer. It is an inflationary tax and it will increase the cost of living by a certain percentage,” Harris asserted.
Anyone who buys food can expect an increase in the cost of living, according to Harris. With salaries and payments at a standstill, some financial obligations may be neglected in order to meet VAT payments. This, Harris stated, would cause a catastrophic domino effect that leads to increased poverty and crime.
For example, a low income individual who works for EC$320 weekly (EC$1280 monthly) under the current system, after paying housing expenses (rent, electricity, cable, etc.) of EC$600, buying groceries for EC$400 and paying children’s school fees and supplies of $150 would typically still have just enough space to save EC $130 of their salary a month. That tiny savings could be nearly evaporated under VAT, according to Harris.
“All of their bills will go up. Everything that you do with goods and services will increase. VAT will be levied on electricity, cable bills and telephone bills. When you go to the doctor, he will give you his bill for $50 dollars but he will add on his 20%, another $10. So, you get a bill for $60 when you used to get it for $50.
“When you build a house, the contractor will charge VAT on labour. When you build a house right now, you don’t have to pay consumption tax on labour, but the VAT must be applied to these now. So, if the labour is $50 000, then you’ll have to find another $10 000 to pay the government. Again, VAT is designed to help the government; it will not help the ordinary man and woman.”
If one were to follow Harris’ predictions for VAT, the previous example of the worker making EC $320 weekly would likely see much of his or her monthly savings being taken away by VAT. Even if VAT were only paid on the EC $400 for food and EC $150 for school materials, that worker could expect to pay an additional EC $110 a month in VAT, leaving only EC $20 a month for savings.
If the worker also paid a 20% VAT on their EC $600 in housing expenses, he or she would actually be short EC $100 on a monthly basis.
While these figures may be slightly alarmist, they paint a grim picture and demonstrate how even a slight increase in cost of living under VAT can snowball and roll over those living hand-to-mouth on their monthly salary.
PM Douglas has repeatedly sought to dismiss such claims of increased cost of living. He explained that the removal of a Consumption Tax of nearly 22% and a number of other nuisance taxes will result in a VAT – if charged at his proposed 19% - having a balancing effect, thus keeping the cost of living relatively the same or perhaps even lowering it.
Harris was sceptical of the PM’s explanation, noting that Consumption Tax is only applied to goods, while VAT will be applied to both goods and services. He went on to say that any cost incurred by businesses in the transition to a new VAT regime, will be passed down to the final consumer and thus directly increase the costs of goods and services.
“Some people are pretending that VAT is replacing Consumption Tax and that it will be the same, but the difference is that VAT is also applied on services. As the retailer is providing you with a service, he must charge you VAT on it. Right now, there is no consumption tax on electricity so that’s an additional charge.
“The larger retailers will have to buy new software [to compute VAT], which is another $20 000 in additional expenses. Plus training their staff, transferring the existing data to the new software or if they have to appoint an accountant to sort out these VAT issues, that’s an initial expenditure of about $50-60 000. The retailer must add on all these overheads in order to maintain the level of profit. We have to pay for it!” Harris noted.
Macroeconomic Advisor in the Fiscal Policy and Regulatory Division of the Ministry of Finance Gary Thomas strongly disagrees with Harris’ projections, noting that while he cannot make a conclusive statement, his ministry does not foresee any significant increase in the cost of living.
He argued that because there has been no agreement on a VAT rate of taxation, consumers should not put too much weight on such estimations and suggestions.
“We haven’t decided on a rate, so it’s difficult for me to comment on that. What I will say convincingly is that whatever the final decision is, we believe that it will result in a decrease in the cost of living and a decline in the cost of importing goods into the country.
“When these savings are passed on to consumers, it will result in an improvement in the quality of life for persons as they benefit from the tax cut. That will come by virtue of having a lower VAT rate as opposed to what is being replaced by the VAT,” Thomas told SKNVibes.
The Ministry official asserted that the current tax system was designed to tax primarily goods. With the economic shift to services, he said it is necessary to introduce a tax that would be applied on both goods and services.
Thomas explained, “This is because, for a number of services, the imports that are going to provide these services attracted the consumption tax 22.5% and then most service providers should have paid 4% trader’s tax on their gross sales. So effectively, a lot of service providers were paying almost 27%. The VAT rate will be set much lower than that at the end of the process and those savings will prevent services from rising sharply.”
Further initiatives to reform Excise Tax and to reduce Corporate Income Tax from the present 33% to about 25% are expected. According to Thomas, this would create a “more competitive and growth-enhancing situation”.
From a government perspective, businesses would be able to thrive and create jobs, causing more persons to be able to find employment opportunities and to support themselves and their families.
Consumers are encouraged to go out to the VAT Awareness sessions to ask questions and understand how the new tax may affect their spending.
